BUS312A/612AFinancial Reporting I

Homework 9.17.2014 & 9.22.2014Statements of Income and Retained Earnings

Chapter 4

Chapter 4 You should be able to:

• Prepare and compare a single-step and a multi-step income statement, including EPS

• Explain the uses and limitations of an income statement

• Compare revenues and expenses with gains and losses; controlling v. noncontrolling interests

• Compare net income and comprehensive income• Describe, account for, and format of irregular income

items: material unusual &/or infrequent items, discontinued operations, extraordinary items, changes in accounting principle or estimate, and error corrections

.

E4-5 (Multiple-step and Single-step) 2014 information for P. Bride Co. ($000 omitted).

Administrative expenseOfficers’ salaries $ 4,900Depreciation of furniture and equipment 3,960

Cost of goods sold 60,570Rental revenue 17,230Selling expense

Delivery expense 2,690Sales commissions 7,980Depreciation of sales equipment 6,480

Sales revenue 96,500Income tax expense 9,070Interest expense 1,860

a) Multiple-step income statement for 2014. Shares outstanding = 40,550 ($000 omitted).

b) Single-step income statement for 2014.

c) Which one is best? Discuss.

Alt. E4-6 (Multiple-step and Extraordinary Items) The following balances were taken from the books of MCA Corp. on December 31, 2014.

Interest revenue $ 86,000Cash 51,000Sales 1,380,000Accounts receivable 150,000Prepaid Insurance 20,000Sales returns and allowances 150,000Allowance for doubtful

accounts 7,000Sales discounts 45,000Land 100,000Equipment 200,000Building 140,000Cost of goods sold 621,000

Accumulated depreciation-equipment $ 40,000Accumulated depreciation-building 28,000Notes receivable 155,000Selling expenses 194,000Accounts payable 170,000Bonds payable 100,000Administrative and general

expenses 97,000Accrued liabilities 32,000Interest expense 60,000Notes payable 100,000Loss from earthquake damage

(extraordinary item) 150,000Common stock 500,000Retained earnings 21,000

Assume the total effective tax rate on all items is 34%.

Prepare a multiple-step income statement; 100,000 shares of common stock outstanding during the year.

E4-14 (Change in Accounting Principle)

Tim Mattke Company began operations in 2012 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2014, in accordance with other companies in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is reported below.

Instructions

(a) What is Mattke’s net income for 2014? Assume a 35% tax rate in all years.

(b) Compute the cumulative effect of the change in accounting principle.

(c) Show the comparative income statements for the company, beginning with income before income tax, as presented on the 2014 income statement.

Year EBIT Weighted-Average

EBIT FIFO

2012 $370,000 $395,000

2013 390,000 430,000

2014 410,000 450,000

E4-15 (Comprehensive Income) Carter Corporation reported the following for 2014: net sales $1,200,000; cost of goods sold $750,000; selling and administrative expenses $320,000; unrealized holding gain on available-for sale securities $18,000.

Prepare a statement of comprehensive income, using (a) the one statement format, and (b) the two statement format. Ignore income taxes and earnings per share).

Alt. E4-16 (Comprehensive Income) Reither Co. reports the following for 2014: sales revenue $700,000; COGS $500,000; operating expenses $80,000; and an unrealized holding loss on available-for-sale securities of $60,000. It declared and paid a cash dividend of $10,000 in 2014.

January 1, 2014 balances in common stock $350,000; accumulated other comprehensive income $80,000; retained earnings $90,000. No stock issued in 2014.

Alt. CA4-6 (Classification of Income Statement Items) What section of the income statement or retained earnings statement should these items be classified? Explain.

1. A merchandising company incorrectly overstated its ending inventory two years ago. Inventory for all other periods is correctly computed.

2. An automobile dealer sells for $137,000 a rare 1930 S type Invicta which it purchased for $21,000 10 years ago. The Invicta is the only such display item the dealer owns.

3. A drilling company extended the estimated useful life of drilling equipment from 9 to 15 years. As a result, depreciation for the current year was materially lowered.

4. A retail outlet changed its computation for bad debt expense from 1% to .5% of sales because of changes in its customer clientele.

5. A mining concern sells a foreign subsidiary engaged in uranium mining, although it (the seller) continues to engage in uranium mining in other countries.

6. A steel company changes from the average-cost to FIFO inventory costing.

7. A company, at great expense, prepared a major proposal for a government loan, which is not approved.

8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the year.

9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in the current year.

10. A sheep rancher suffered a major loss because the state required that all sheep be killed to halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years.

11. A food distributor that sells to supermarket chains and fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to supermarkets.

CA4-3 (Earnings Management)

The controller for Kelly Corporation is preparing the company’s income statement at year-end. He notes that the company has lost a considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely in the past, he knows the losses cannot be reported as extraordinary. He does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets’ lives, the losses would not be so great. Since depreciation is included among the company’s operating expenses, he wants to report the losses along with the company expenses, where he hopes it will not be noticed.Instructions(a) What are the ethical issues involved?

(b) What should the controller do?

Ss

• Both GAAP and IFRS require companies to indicate the amount of net income attributable to noncontrolling interest.

• Both GAAP and IFRS follow the same presentation guidelines for discontinued operations, but IFRS defines a discontinued operation more narrowly. Both standard-setters have indicated a willingness to develop a similar definition to be used in the joint project on financial statement presentation.

• Both GAAP and IFRS have items that are recognized in equity as part of comprehensive income but do not affect net income. Both GAAP and IFRS allow a one statement or two statement approach to preparing the statement of comprehensive income.

Differences• Presentation of the income statement under GAAP follows either a single-step or multiple-step format. IFRS does not mention a single-

step or multiple-step approach. In addition, under GAAP, companies must report an item as extraordinary if it is unusual in nature and infrequent in occurrence. Extraordinary items are prohibited under IFRS.

• Under IFRS, companies must classify expenses by either nature or function. GAAP does not have that requirement, but the SEC requires a functional presentation.

• IFRS identifies certain minimum items that should be presented on the income statement. GAAP has no minimum information requirements. However, the SEC rules have more rigorous presentation requirements.

• IFRS does not define key measures like income from operations. SEC regulations define many key measures and provide requirementsand limitations on companies reporting non-GAAP/IFRS information.

• Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted and is reported as other comprehensive income. The effect of this difference is that application of IFRS results in more transactions affecting equity but not net income.

Following are the key similarities and differences between GAAP and IFRS related to the income statement.

The correct order to present current assets is

a. Cash, accounts receivable, prepaid items, inventories.

b. Cash, accounts receivable, inventories, prepaid items.

c. Cash, inventories, accounts receivable, prepaid items.

d. Cash, inventories, prepaid items, accounts receivable.

Classification in the Balance Sheet

Question

Order of Liquidity

Question

In preparing a statement of cash flows, which of the following

transactions would be considered an investing activity?

a. Sale of equipment at book value

b. Sale of merchandise on credit

c. Declaration of a cash dividend

d. Issuance of bonds payable at a discount receivable.

Statement of Cash Flows

Current assets under IFRS are listed generally:

a. by importance.

b. in the reverse order of their expected conversion to cash.

c. by longevity.

d. alphabetically.

IFRS SELF-TEST QUESTION

Companies that use IFRS:

a. may report all their assets on the statement of financial position

at fair value.

b. are not allowed to net assets (assets 2 liabilities) on their

statement of financial positions.

c. may report noncurrent assets before current assets on the

statement of financial position.

d. do not have any guidelines as to what should be reported on the

statement of financial position.

IFRS SELF-TEST QUESTION

A company has purchased a tract of land and expects to build a

production plant on the land in approximately 5 years. During the 5

years before construction, the land will be idle. Under IFRS, the land

should be reported as:

a. land expense.

b. property, plant, and equipment.

c. an intangible asset.

d. a long-term investment.

IFRS SELF-TEST QUESTION